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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(MARK ONE)

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2015

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM               TO               .

 

Commission File No. 001-35779

 

USA Compression Partners, LP

(Exact name of registrant as specified in its charter)

 

 

(512) 473-2662

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

As of November 3, 2015, there were 37,593,010 common units and 14,048,588 subordinated units outstanding.

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.Financial Statements

 

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(Dollars in thousands, except unit amounts)

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except unit amounts)

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital

Nine Months Ended September 30, 2015

(Dollars and units in thousands)

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)  Organization and Summary of Significant Accounting Policies

 

(a)  Organization

 

USA Compression Partners, LP (the “Partnership”) is a publicly traded Delaware limited partnership formed to own and operate the business conducted by its subsidiaries. The common units representing limited partner interests in the Partnership (“common units”) are listed on the New York Stock Exchange (“NYSE”) under the symbol “USAC.” USA Compression GP, LLC, the general partner of the Partnership (the “General Partner”), is owned by USA Compression Holdings, LLC (“USA Compression Holdings”). Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Partnership” are intended to mean the business and operations of the Partnership and its wholly owned, consolidated subsidiaries (the “Operating Subsidiaries”).  References to “Argonaut” refer to Argonaut Private Equity, L.L.C.

 

The Partnership, through its Operating Subsidiaries, provides compression services under term contracts with customers in the crude oil and natural gas industry, using natural gas compression packages that it designs, engineers, owns, operates and maintains. The unaudited condensed consolidated financial statements include the accounts of the Partnership and the Operating Subsidiaries, and all intercompany balances and transactions have been eliminated in consolidation.

 

The Partnership’s ownership is as follows:

 

 

Partnership net income (loss) is allocated to the partners, both general and limited, in proportion to their respective interest in the Partnership.

 

(b)  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared on the same basis as the audited consolidated financial statements included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2014 filed on February 19, 2015 (our “2014 Annual Report”). In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position as of September 30, 2015 and December 31, 2014, and the results of operations for the three and nine months ended September 30, 2015 and 2014, changes in partners’ capital for the nine months ended September 30, 2015 and the statements of cash flows for the nine months ended September 30, 2015 and 2014 in accordance with U.S. generally accepted accounting principles (“GAAP”). Operating results for the three and nine months ended September 30, 2015 and 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Therefore, these consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2014 contained in our 2014 Annual Report.

 

(c)  Use of Estimates

 

The unaudited condensed consolidated financial statements of the Partnership have been prepared in conformity with GAAP, which includes the use of estimates and assumptions by management that affect the reported amounts of assets,

liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the unaudited condensed consolidated financial statements. Although these estimates are based on management’s available knowledge of current and expected future events, actual results could differ from these estimates.

 

(d)  Identifiable Intangible Assets

 

As of September 30, 2015, identifiable intangible assets, net consisted of the following (in thousands):

 

 

Identifiable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the period over which the assets are expected to contribute directly or indirectly to the Partnership’s future cash flows. The estimated useful lives range from 4 to 30 years.  Accumulated amortization of intangible assets was $15.5 million and $12.8 million as of September 30, 2015 and December 31, 2014, respectively.

 

The Partnership assesses identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Partnership did not record any impairment of identifiable intangible assets for the three and nine months ended September 30, 2015 or 2014.

 

(e)  Property and Equipment

 

Property and equipment are carried at cost. Overhauls and major improvements that increase the value or extend the life of compression equipment are capitalized and depreciated over 3 to 5 years. Ordinary maintenance and repairs are charged to cost of operations, exclusive of depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:

 

 

See more information on property and equipment in Note 3 to our unaudited condensed consolidated financial statements.

 

(f)   Impairments of Long-Lived Assets

 

Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written-down to estimated fair value. An asset shall be tested for impairment when events or circumstances indicate that its carrying value may not be recoverable or will no longer be utilized in the operating fleet. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value exceeds the sum of the undiscounted cash flows associated with the operating fleet, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet units the Partnership recently sold or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment the Partnership plans to use.   

 

Refer to Note 3 to our unaudited condensed consolidated financial statements for more detailed information about impairment charges during the three and nine months ended September 30, 2015.  

 

(g)   Fair Value Measurements

 

Accounting standards on fair value measurements establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and nonrecurring financial and non-financial assets and liabilities that require or permit fair value measurements. Among the required disclosures is the fair value hierarchy of inputs the Partnership uses to value an asset or a liability. The three levels of the fair value hierarchy are described as follows:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Partnership has the ability to access at the measurement date.

 

Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 inputs are unobservable inputs for the asset or liability.

 

As of September 30, 2015 and December 31, 2014, the Partnership’s financial instruments consisted primarily of cash and cash equivalents, trade accounts receivable, trade accounts payable and long-term debt. The book values of cash and cash equivalents, trade accounts receivable and trade accounts payable are representative of fair value due to their short-term maturity. The carrying amount of long-term debt approximates fair value due to the floating interest rates associated with the debt.

 

Phantom unit awards granted to employees under the USA Compression Partners, LP 2013 Long-Term Incentive Plan (the “LTIP”) are accounted for as a liability, and such liability is re-measured on a quarterly basis.  The liability is based on the publicly quoted price of the Partnership’s common units, which is considered a Level 1 input. As of September 30, 2015 and December 31, 2014, the total unit-based compensation liability was $1.7 million and $1.3 million, respectively.

 

(h)   Operating Segment

 

The Partnership operates in a single business segment, the compression services business.

 

(i) Pass Through Taxes

 

Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis.

 

(2)  Trade Accounts Receivable

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts, which was $1.5 million and $0.4 million at September 30, 2015 and December 31, 2014, respectively, is the Partnership’s best estimate of the amount of probable credit losses included in the Partnership’s existing accounts receivable. The Partnership determines the allowance based upon historical write-off experience and specific customer circumstances. The Partnership does not have any off-balance-sheet credit exposure related to its customers.

 

(3)  Property and Equipment

 

Property and equipment consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):

 

 

We recognized $20.5 million and $17.4 million of depreciation expense on property and equipment for the three months ended September 30, 2015 and 2014, respectively.  We recognized $60.9 million and $48.8 million of depreciation expense on property and equipment for the nine months ended September 30, 2015 and 2014, respectively.

 

As of September 30, 2015 and December 31, 2014, there was $20.6 million and $32.4 million, respectively, of property and equipment purchases in accounts payable and accrued liabilities.

 

During the nine months ended September 30, 2015, non-cash transfers of inventory to and from property and equipment totaled approximately $1.0 million.  These transfers have been treated as non-cash inventory activities in the Unaudited Condensed Consolidated Statements of Cash Flows.

 

During the nine months ended September 30, 2015, insurance recoveries of $0.6 million were received on previously impaired compression equipment and are reported within the Loss (gain) on sale of assets line in the Unaudited Condensed Consolidated Statements of Operations. 

 

During the three months ended September 30, 2015, the Partnership incurred equipment damage to one of its fleet units resulting in a $0.4 million impairment of long-lived assets.  During the three months ended June 30, 2015, the Partnership evaluated the future deployment of its idle fleet under current market conditions and determined to retire and either sell or re-utilize the key components of 166 compressor units, or approximately 58,000 horsepower, that were previously used to provide services in the Partnership’s business.  This compression equipment was written down to its respective estimated salvage value, measured using quoted market prices, or the estimated component value of the equipment the Partnership plans to use.  As a result, the Partnership recorded a  $27.3 million impairment of long-lived assets in the nine months ended September 30, 2015.  The Partnership recorded a $1.2 million impairment of compression equipment for each of the three and nine months ended September 30, 2014.

 

(4) Accrued Liabilities

 

Other current liabilities included accrued salaries and benefits and accrued property taxes.  The Partnership recognized $9.6 million and $5.5 million of accrued salaries and benefits as of September 30, 2015 and December 31, 2014, respectively.  The Partnership recognized $5.9 million and $4.8 million of accrued property taxes as of September 30, 2015 and December 31, 2014, respectively.

 

(5) Income Tax Expense

 

The Partnership is not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax. Therefore, income taxes are not levied at the entity level, but rather on the individual partners of the Partnership. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include a provision for federal and state income taxes.

 

The Partnership is subject to the Revised Texas Franchise Tax (“Texas Margin Tax”). The Texas Margin Tax is computed on modified gross margin.  The Partnership does not do business in any other state where a similar tax is applied.

 

Components of income tax expense are as follows (in thousands):

 

Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The tax effects of temporary differences that give rise to deferred tax liabilities are as follows (in thousands):

 

 

 

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic 740-10 (“ASC 740-10”) provides guidance on measurement and recognition in accounting for income tax uncertainties and provides related guidance on derecognition, classification, disclosure, interest, and penalties. As of September 30, 2015, the Partnership had no material unrecognized tax benefits (as defined in ASC 740-10). We do not expect to incur interest charges or penalties related to our tax positions, but if such charges or penalties are incurred, our policy is to account for interest charges as Interest expense, net and penalties as Income tax expense in the Unaudited Condensed Consolidated Statements of Operations.

 

(6)  Long-Term Debt

 

The long-term debt of the Partnership, of which there is no current portion, consisted of the following as of September 30, 2015 and December 31, 2014 (in thousands):

 

 

Revolving Credit Facility

 

As of September 30, 2015 the Partnership was in compliance with all of its covenants under its revolving credit facility.

 

As of September 30, 2015, the Partnership had outstanding borrowings under its revolving credit facility of $712.3 million, $151.3 million of available borrowing capacity and borrowing base availability of $387.7 million. The Partnership’s interest rate in effect for all borrowings under its revolving credit facility as of September 30, 2015 and December 31, 2014 was 2.26% and 2.16%, respectively, with a weighted average interest rate of 2.25% and 2.29% during the three months ended September 30, 2015 and 2014, respectively, and 2.23% and 2.24% during the nine months ended September 30, 2015 and 2014, respectively.  There were no letters of credit issued as of September 30, 2015 or 2014.

 

In the event that any of the Operating Subsidiaries guarantees any series of the debt securities as described in the Partnership’s registration statement filed on Form S-3 (Reg. No. 333-193724), such guarantees will be full and

unconditional and made on a joint and several basis for the benefit of each holder and the Trustee. However, such guarantees will be subject to release, subject to certain limitations, as follows (i) upon the sale, exchange or transfer, whether by way of a merger or otherwise, to any Person that is not an Affiliate of the Partnership, of all the Partnership’s direct or indirect limited partnership or other equity interest in such Subsidiary Guarantor; or (ii) upon the Partnership’s or USA Compression Finance Corp.’s (together, the “Issuers”) delivery of a written notice to the Trustee of the release or discharge of all guarantees by such Subsidiary Guarantor of any Debt of the Issuers other than obligations arising under the indenture governing such debt and any debt securities issued under such indenture, except a discharge or release by or as a result of payment under such guarantees.   Capitalized terms used but not defined in this paragraph are defined in the Form of Indenture filed as exhibit 4.1 to such registration statement.

 

The revolving credit facility matures in January 2020 and the Partnership expects to maintain this facility for the term. 

 

(7)  Partners’ Capital

 

As of November 3, 2015, USA Compression Holdings held 6,581,328 common units and 14,048,588 subordinated units and controlled the General Partner which held an approximate 1.5% general partner interest (the “General Partner’s Interest”) and the incentive distribution rights (“IDRs”). See the Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital.

 

Subordinated Units

 

All of the subordinated units are held by USA Compression Holdings. The Partnership’s limited partnership agreement (the “Partnership Agreement”) provides that, during the subordination period, the common units have the right to receive distributions of Available Cash from Operating Surplus (each as defined in the Partnership Agreement) each quarter in an amount equal to $0.425 per common unit (the “Minimum Quarterly Distribution”), plus any arrearages in the payment of the Minimum Quarterly Distribution from Operating Surplus on the common units from prior quarters, before any distributions of Available Cash from Operating Surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from Operating Surplus until the common units have received the Minimum Quarterly Distribution plus any arrearages from prior quarters. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be Available Cash from Operating Surplus to be distributed on the common units. The subordination period will end on the first business day after the Partnership has earned and paid at least (i) $1.70 (the Minimum Quarterly Distribution on an annualized basis) on each outstanding unit and the corresponding distribution on the General Partner’s Interest, for each of three consecutive, non-overlapping four-quarter periods ending on or after December 31, 2015 or (ii) $2.55  (150.0% of the annualized Minimum Quarterly Distribution) on each outstanding unit and the corresponding distributions on the General Partner’s Interest and the related distribution on the IDRs for the four-quarter period immediately preceding that date. When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages.

 

Cash Distributions

 

The Partnership has declared quarterly distributions per unit to limited partner unitholders of record, including holders of common and subordinated units, and distributions paid to the General Partner, including the General Partner’s Interest and IDRs, as follows (dollars in millions, except distribution per unit):

 

 

Announced Quarterly Distribution

 

On October 22, 2015, the Partnership announced a cash distribution of $0.525 per unit on its common and subordinated units. The distribution will be paid on November 13, 2015 to unitholders of record as of the close of business on November 3, 2015. USA Compression Holdings, the owner of approximately 40% of the Partnership’s outstanding limited partner interests, and Argonaut and certain of its related parties, the owners of approximately 16% of the Partnership’s outstanding limited partner interests, each have elected to reinvest all of this distribution with respect to its units pursuant to the Partnership’s distribution reinvestment plan (the “DRIP”). 

 

Dividend Reinvestment Program

 

During the nine months ended September 30, 2015 and 2014, distributions of $41.7 million and $38.5 million, respectively, were reinvested under the DRIP resulting in the issuance of 2.2 million and 1.5 million common units, respectively.  Such distributions are treated as non-cash transactions in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.  After taking into account the number of common units issued under the DRIP through September 30, 2015,  the Partnership has the capacity to issue an additional 3.0 million common units under the DRIP.

 

Equity Offering

 

On September 15, 2015, the Partnership closed a public offering of 4,000,000 common units at a price to the public of $19.33.  The Partnership used the net proceeds of $74.4 million (net of underwriting discounts and commission and offering expenses) to reduce the indebtedness outstanding under its revolving credit facility. 

 

Earnings Per Common and Subordinated Unit

 

The computations of earnings per common unit and subordinated unit are based on the weighted average number of common units and subordinated units, respectively, outstanding during the applicable period. The subordinated units and the General Partner’s Interest (including its IDRs) meet the definition of participating securities as defined by the FASB’s Accounting Standards Codification Topic 260 Earnings Per Share; therefore, the Partnership is required to use the two-class method in the computation of earnings per unit. Basic earnings per common and subordinated unit are determined by dividing net income allocated to the common and subordinated units, respectively, after deducting the amount allocated to the General Partner (including distributions to the General Partner on the General Partner Interest and its IDRs), by the weighted average number of outstanding common and subordinated units, respectively, during the period. Net income is allocated to the common units, subordinated units and the General Partner Interest (including its IDRs) based on their respective shares of the distributed and undistributed earnings for the period. To the extent cash distributions exceed net income for the period, the excess distributions are allocated to all participating units outstanding based on their respective ownership percentages. Diluted earnings per unit are computed using the treasury stock method, which considers the potential issuance of limited partner units associated with the LTIP.  Unvested phantom units are not included in basic earnings per unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per unit.    

 

Incentive Distribution Rights

 

The General Partner holds all of the IDRs. The following table illustrates the percentage allocations of Available Cash from Operating Surplus between the unitholders and the General Partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the General Partner and the unitholders in any Available Cash from Operating Surplus the Partnership distributes up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit.” The percentage interests shown for the Partnership’s unitholders and the General Partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for the General Partner include its General Partner’s Interest, and assume the General Partner

has contributed any additional capital necessary to maintain its General Partner’s Interest, the General Partner has not transferred the IDRs and there are no arrearages on common units.

 

 

 

 

 

(8)  Transactions with Related Parties

 

William Shea, Jr., who has served as a director of the General Partner since June 2011, served as Chief Executive Officer of the general partner of PVR Partners, L.P. (“PVR”) from March 2010 to March 2014. In March 2014, PVR merged with and into Regency Energy Partners LP, a Delaware limited partnership (“Regency”), with Regency as the surviving limited partnership (the “Merger”) and PVR ceasing existence as a separate limited partnership. For the three months ended March 31, 2014, the Partnership recognized approximately $0.6 million in revenue on compression services from subsidiaries of PVR.

 

John Chandler, who has served as a director of the General Partner since October 2013, has served as a director of CONE Midstream GP, LLC (“CONE”) since October 2014. During the three and nine months ended September 30, 2015, the Partnership recognized $2.3 million and $6.3 million, respectively, in revenue on compression services and $0.9 million in accounts receivable from CONE on the Unaudited Condensed Consolidated Balance Sheet as of September 30, 2015.

 

(9)  Commitments and Contingencies

 

(a)  Major Customers

 

The Partnership had revenue from one customer representing 10.2% and 11.3% of total revenue for the three months ended September 30, 2015 and 2014, respectively. The Partnership had revenue from the same customer representing 10.4% and 11.7% of total revenue for the nine months ended September 30, 2015 and 2014, respectively.  No other customer represented greater than 10% of revenue for the three or nine months ended September 30, 2015 or 2014.

 

(b)  Litigation

 

From time to time, the Partnership and its subsidiaries may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on the Partnership’s consolidated financial position, results of operations or cash flows.

 

(c)  Equipment Purchase Commitments

 

The Partnership’s future capital commitments are comprised of binding commitments under purchase orders for new compression units ordered but not received. The commitments as of September 30, 2015 were $38.8 million, all of which are expected to be settled within the next twelve months.

 

(10)  Recent Accounting Pronouncement

 

In April 2015, the FASB issued an Accounting Standards Update (“ASU”) that clarified when fees paid in a cloud computing arrangement pertain to the acquisition of a software license and/or services.  When a cloud computing arrangement includes a license of software, the fee attributable to the software license portion of the arrangement will be capitalized when the criteria for capitalization of internal-use software are met.  When a cloud computing arrangement does not include a license of software, the arrangement will be treated as a service contract and the cost will be expensed as the services are received.  This ASU is effective for annual and interim periods in fiscal years beginning after

December 15, 2015. Early adoption is permitted and entities may elect to adopt this ASU either prospectively, for all arrangements entered into or materially modified after the effective date, or retrospectively. The Partnership is currently evaluating the impact, if any, of this ASU on its consolidated financial statements. 

 

In July 2015, the FASB agreed to defer by one year the mandatory effective date of its revenue recognition standard to annual and interim periods in fiscal years beginning after December 15, 2017, but will also provide entities the option to adopt it as of the original effective date. The option to use either a retrospective or cumulative-effect transition method will not change.  The Partnership is currently evaluating the impact, if any, of this ASU on its consolidated financial statements.

 

Also in July 2015, the FASB issued an ASU that changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value.  This ASU requires prospective adoption for inventory measurements for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted. The Partnership is currently evaluating the impact, if any, of this ASU on its consolidated financial statements.

 

 

 

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements.” All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our plans, strategies, prospects and expectations concerning our business, results of operations and financial condition. You can identify many of these statements by looking for words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “continue” or similar words or the negative thereof.

 

Known material factors that could cause our actual results to differ from those in these forward-looking statements are described in Part II, Item 1A (“Risk Factors”) and elsewhere in this report. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

 

 

 

 

 

 

 

 

 

 

All forward-looking statements included in this report are based on information available to us on the date of this report and speak only as of the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.

 

Overview

 

We provide compression services in a number of shale plays throughout the U.S., including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville and Fayetteville shales. The demand for our services is driven by the domestic production of natural gas and crude oil; as such, we have focused our activities in areas of attractive production growth, which are generally found in these shale and unconventional resource plays.  According to recent studies promulgated by the Energy Information Agency (“EIA”), the overall natural gas production and transportation volumes from domestic shale plays are expected to increase over time due to the comparably attractive economic returns versus returns achieved in many conventional basins. Furthermore, the changes in production volumes and pressures of shale plays over time require a wider range of compression services than in conventional basins. We believe the flexibility of our compression units positions us well to meet these changing operating conditions. While our business focuses largely on compression services serving infrastructure installations, including centralized natural gas gathering systems and processing facilities, which utilize large horsepower compression units, typically in shale plays, we also provide compression services in more mature conventional basins, including gas lift applications on crude oil wells targeted by horizontal drilling techniques.

 

General Trends and Outlook

 

Since late 2014, commodity prices, and in particular crude oil prices, have declined significantly and have remained depressed. While our business does not have direct exposure to commodity prices, the current price environment has resulted in a slowdown in activity in many operating regions, particularly in those plays where producers target oil or other liquids. We believe this decreased level of operating activity could lead to less, or more delayed, incremental demand for compression services than in the recent past, although existing production will continue to require compression, and we expect our customers will continue to seek our infrastructure-oriented compression services.

 

A significant amount of our assets are utilized in natural gas infrastructure applications, primarily in centralized gathering systems and processing facilities. Given the project nature of these applications and long-term investment horizon of our customers, we have generally experienced stability in service rates and higher sustained utilization rates relative to other businesses more tied to drilling activity and wellhead economics. A small portion of our fleet is used in connection with crude oil production using horizontal drilling techniques.  Given the more pronounced crude oil price reduction, we have experienced a limited amount of pressure on service rates in gas lift applications, and expect that this trend could continue as prices remain depressed and activity levels remain low. To the extent we have seen pressure on those service rates, we have typically been able to secure some combination of future order commitments, exclusive service provider status or competitor equipment replacement agreements from our customers to help offset the decrease in pricing.

 

We believe that demand for our compression services will continue for the remainder of 2015 and throughout 2016, although management cannot predict any possible changes in such demand with reasonable certainty.  We continue to monitor developments in our customer base, and we believe that there will continue to be demand for our services given the necessity of compression services in allowing for the transportation and processing of natural gas as well as the production of crude oil. We intend to prudently grow the number of compression units in our fleet, primarily through the purchase of larger horsepower units that tend to generate higher margins and command longer contract terms, in order to be positioned to take advantage of attractive market opportunities.

 

Our ability to increase our revenues is dependent in large part on our ability to add new revenue generating compression units to our fleet while maintaining our utilization and contract rates. Through the nine months ended September 30, 2015, we increased our fleet size while maintaining high utilization and economically attractive service rates.  Revenue generating horsepower increased by 12.4% from September 30, 2014 to September 30, 2015. Average revenue generating horsepower increased by 16.2% from the three months ended September 30, 2014 to the three months ended September 30, 2015. Average revenue per revenue generating horsepower per month increased approximately 3% in the nine months ended September 30, 2015 from the nine months ended September 30, 2014 and increased approximately 2% in the three months ended September 30, 2015 from the three months ended September 30, 2014. Average utilization decreased approximately 4% in the three and nine months ended September 30, 2015 from the three and nine months ended September 30, 2014.  The decrease in utilization is primarily attributable to an increase in the amount of time contracting new compression units.  We believe this is the result of a delay in planned projects of certain of our customers.  For the year ending December 31, 2015, we have ordered approximately 220,000 horsepower of new compression unit equipment, of which we have taken delivery of approximately 195,000 horsepower through September 30, 2015.

 

The EIA has projected that natural gas production growth will continue in the coming years due to increases in drilling efficiencies as well as a backlog of drilled but uncompleted wells in major supply areas, such as the Marcellus Shale. Additionally, according to the EIA, domestic exports, both to Mexico and through the start-up of various liquefied natural gas (“LNG”) projects in late 2015 and beyond, will increase. The EIA projects that approximately 70% of the increase in natural gas production through 2040 will come from shale plays, which typically require greater compression horsepower than conventional production.

 

Operating Highlights

 

The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented.

 

 

 

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The 16.1% increase in fleet horsepower as of September 30, 2015 over the fleet horsepower as of September 30, 2014 was attributable to the compression units added to our fleet to meet the incremental demand by new and current customers for our compression services.  The 16.2% increase in revenue generating horsepower as of September 30, 2015 over September 30, 2014 was primarily due to organic growth in our large horsepower fleet.  

 

The following table summarizes other financial data for the periods presented (dollars in thousands):

 

 

 

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Adjusted EBITDA.  The increase in Adjusted EBITDA during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was primarily attributable to a $11.0 million increase in Gross operating margin.  The increase in Gross operating margin is primarily attributable to increased revenue resulting from a 16.2% increase in average revenue generating horsepower due to increased demand for our compression services, partially offset by higher operating expenses.  

 

The increase in Adjusted EBITDA during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was primarily attributable to a $36.4 million increase in Gross operating margin, offset by a $1.3 million increase in selling, general and administrative expenses.  The increase in Gross operating margin is primarily attributable to increased revenue resulting from a 21.2% increase in average revenue generating horsepower due to increased demand for our compression services, partially offset by higher operating expenses.

 

Adjusted DCF.  The increase in Adjusted DCF during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was primarily attributable to a $11.0 million increase in Gross operating margin and lower maintenance capital expenditures, partially offset by higher cash interest expense, net.  The increase in Gross operating margin is primarily attributable to increased revenue resulting from a 16.2% increase in average revenue generating horsepower due to increased demand for our compression services, partially offset by higher operating expenses.

 

The increase in Adjusted DCF during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was primarily attributable to a $36.4 million increase in Gross operating margin and lower maintenance capital expenditures, offset by higher cash interest expense, net.  The increase in Gross operating margin is primarily attributable to increased revenue resulting from a 21.2% increase in average revenue generating horsepower due to increased demand for our compression services, partially offset by higher operating expenses.